Last year was a banner year for chief executive departures. Roughly 17 percent of the world’s public companies changed CEOs in 2015, according to a study by professional services firm PricewaterhouseCoopers, the highest such figure in 16 years.
While that number is discouraging on its own, it is made more worrisome when paired with other indicators showing that most firms are woefully bad at CEO succession.
A 2014 survey conducted by the National Association of Corporate Directors, for instance, showed that two-thirds of U.S. public and private companies say they have no formal CEO succession plan. Moreover, according to research from executive search firm Korn Ferry, just one-third of the executives who told the firm that their companies have a succession plan also said they were satisfied with it.
The reasons explaining firms’ poor succession track record are varied. Most boards and bosses are busy running the company’s day-to-day business, and an uncertain and ever-changing economic environment has made planning beyond a few years seem futile. But a prominent reason is that, in many firms, the CEOs themselves aren’t responsible for planning their eventual replacement. That responsibility traditionally falls on a firm’s board of directors — a constituent typically mired in other governance matters and one that is likely hesitant to broach such a sensitive subject with a sitting CEO. After all, what leader wants to spend time thinking about who is fit to replace them?
It’s time for CEOs to lead that effort, and it’s time for boards to be stricter in encouraging CEOs to do so.
For starters, markets react far better to firms that have solid CEO succession plans in place. Consider the preplanned shift of Sundar Pichai into the top spot at Google Inc. while Larry Page, the former chief — and Pichai mentor — moved into the CEO slot at parent company Alphabet Inc. That move contrasts directly to industry giants United Airlines Inc. and Volkswagen AG. Both recently experienced sudden CEO departures without ready successors, and both saw the markets react negatively to the unrest.
To be sure, having a CEO lead the process of planning their replacement isn’t easy, according to Noel Tichy, a professor at the Ross School of Business at the University of Michigan and author of the 2014 book “Succession: Mastering the Make-or-Break Process of Leadership Transition.” That’s why it’s important for firms to have an established infrastructure around internal leadership development. Tichy, during his time as Jack Welch’s HR head at General Electric Co., worked to develop Crotonville, the firm’s internal leadership development facility in New York.
“The role of Crotonville was really developing leadership,” Tichy said. “It wasn’t functional or about engineering. It was an executive development program of about 40 people who only got into the program because Welch hand-picked them and signed off on them coming. That’s him planning his own succession.”
Another reason CEOs need to take the reins of their own succession is to ensure the next boss is homegrown. According to the PwC study, industries with the highest average CEO turnover are the ones that continue to hire externally. “Your good leaders are embedded in the field,” Tichy said. That means the firm’s CEO needs to be the one spotting bright leaders and grooming them for the top role.
Some firms have instituted specific tools to help CEOs plan their own succession.
Professional services firm Deloitte LLP, for instance, has a sponsorship process that it uses to bolster leadership development toward eventual CEO succession planning, according to Mike Fucci, the firm’s chairman of the board. Last year the firm appointed an internal candidate, Cathy Engelbert, to the top job. A longtime Deloitte leader, Engelbert was plucked from the head role in the firm’s audit subsidiary.
“Unlike mentorship, which is more vertically focused, sponsorship is more horizontal,” Fucci said. “It has helped us bring someone to the succession table who maybe wasn’t ‘in line’ and might not have been considered otherwise. When the vertical pipeline is disrupted the diversity of leaders widens.”
CEOs who plot their own succession can also make sure the next leader maintains their vision and continues to embody the company’s values. Bottom-line results are critical factors in assessing CEO success, but companies should also be evaluating the success of their CEO based on their ability to build a strong bench of candidates within the company. For companies with self-imposed mandates or a value system focused on minority or gender-diverse hiring, the CEO needs to be accountable for making sure the pipeline includes diversity as well. Female CEOs, in particular, remain a persistently small group.
This puts further significance on CEO-led talent reviews. SAP SE is one such firm whose CEO, Bill McDermott, has put high emphasis on internal talent reviews as a means to plan for future company leaders, according to David Swanson, the software company’s global lead of human resources. “Bill and our chief human resources officer conduct two formal executive talent reviews each year,” Swanson said. “These are spirited conversations about individuals; it’s not a tick-the-box exercise.” He continued: “Bill will go back and ask what have we done with this person — how are we getting them ready?”
Perhaps most important, taking a hands-on view of CEO succession planning has grown in significance thanks to demographic shifts in the workforce. With the majority of the workforce now made up of millennials, an age group primarily under the age of 30, companies will face an inevitable loss of critical knowledge in the coming years. This should put further pressure on current CEOs to put measures in place to ensure leadership skills are properly passed on now.
“There is a leadership cliff that’s looming in many organizations,” SAP’s Swanson said. “Domain knowledge is exiting, millennials who are coming in are maybe not connected with the vision, values or purpose of an organization.”
The future of succession planning is at risk if the CEO doesn’t make sure potential successors are not just in the pipeline, but that they understand the company’s broader mission. Failing to do so will continue to encourage hastily enacted plans that favor external hires or those with contrasting experience or values. While these reactionary efforts ultimately fill the role, the bumps the company takes as a result are bad for business.
Geri Anne Fennessey is a freelance writer based in New York City. This article originally appeared in the Fall 2016 issue of Talent Economy Quarterly. Read the digital edition here.
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